We were recently asked for advice concerning a proposed large charitable donation. The simple question was “Should it be made personally or through a corporation?”. As is usual in all things tax-related, the answer is “It depends…”
In this case, there is a very large capital gain on the sale of corporate-owned real estate. Our clients wanted to minimize the tax liability by making a charitable donation and asked us for advice. The individuals have significant investment income. To make matters even more interesting, the capital gain occurred just after the corporation’s 2018 fiscal year end.
To answer their question, we first have to review the tax implications of making the donation personally and the consequences of having the corporation make the donation. For individuals, eligible donations result in a non-refundable tax credit which can be used to reduce income tax owing. Unused donations can be carried forward for up to 5 years. The credit is graduated so that the tax saving is (for 2018) $22.88 for every $100 of donations on the first $200 and $50.41 for every $100 of donations over $200. This is a great incentive to make donations since every dollar donated in excess of $200 results in a tax savings of $0.50.
For corporations, the system is different since donations are dealt with as deductions from income rather from tax owing. Currently, for Ontario businesses earning an active income of less than $500,000, a $100 donation results in a $13.50 tax reduction and if income exceeds $500,000 the tax reduction increases to $26.50. If the income is non-active – for example, investment income – the net tax savings could be as high as $50.20 for every $100 of donation, however, this is complicated by the operation of the Refundable Dividend Tax On Hand/Dividend Refund regime.
The actual detailed comparative computations are outside of the scope of this brief overview, but there is a broad rule: If an individual taxpayer will have more than $200,000 of taxable income, then it will make sense to have the corporation make the charitable donation, otherwise, the donation should be made personally.
Disclaimer: This article is intended for educational and informational purposes only. It is not intended in any way whatsoever to provide tax advice. The reader should be aware that certain legislative changes and government announcements have been proposed and are subject to change. None of the persons involved in the preparation of this article accepts any responsibility for its contents or the consequences that arise from its use.
As always, please do not hesitate to contact us if you have any questions.
Jerry Paskowitz, CPA, CA, CMC, is a Partner with Sloan Partners with over 30 years’ experience in all tax and financial matters. Get in touch with Jerry by email or phone 416-649-7702 for an appointment to discuss tax savings opportunities and financial strategies for your business.